How Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall Street Will Enable This Without Sheeple Investor’s Having a Clue

The Apple Forensic Analysis and Valuation is nearly complete and will
be available to subscribes in a few days. In the meantime I will
discuss a few salient points and logic that went into the design of the
model. As I have said several time in the recent past, Apple is very
similar to gold in its elicitation of passion and emotional responses
from both those that own it and those that invest in it. I am sure this
article will prove proof-positive of such as Apple fanbois and haters
jump all over the comment columns. The fact of the matter is, whether
concerning Apple or gold, allowing you emotions, passions likes and
dislikes to cloud the empirical process of analysis is a sure fire path
to losing money – Sure fire!

The Front Runners for Supremacy in the Mobile Computing and Telecomm Paradigm Shift

On that note, let me remind all that There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All. Computing and personal technology services are turning portable, thin client, and to the cloud. The
stakes are high in this one, for the winner will most likely end up
being the next Microsoft. No matter how maligned Microsoft may be in the
new millenium, no other tech company makes (or has made) as much money
as Gates, Ballmer, crew. It’s an enviable problem to have. I have
narrowed down the likely front runners for this position to be none
other than:

Microsoft itself. Yes, Microsoft
came out on top of the last paradigm shift and became the next
Microsoft, the first tech company that I can think of to remain on top
after a paradigm shift, kudos to management.Don’t be surprised if
Microsoft manages to become Microsoft again, for the 3rd time. Several
industries are littered with failed and marginalized companies that
underestimated Mr. Softie due to strategies and models that took several
years to pan out and were instead recognized as (wrongly) as failure.
It looks like MSFT is trying to right the ship with Windows Mobile 7,
now management has to execute – something they have been failing to do
for the last few years in this space. See Don’t Count Microsoft Out of the Ultra-Mobile Computing Wars Just Yet and After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play for more on the logic behind Microsoft triumphant.

Apple, who has torn through the
consumer mobile computing and music industries with innovative ways to
market and implement existing technologies and simultanesouly capture
both market share and margin. See An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught
for the logic behind Apple triumphant. Of course, Apple’ s biggest
strength is also its biggest weakness, the loyalty of the often
irrational (allowing Apple to charge a premium and.or lock customers
into an ecostystem where one may not be deserved), yet often fickle
(presenting the opportunity for said premium to quickly evaporate as
fads change) consumer.

I follow the comment sections of many prominent, and some not so
prominent but nonetheless excellent blogs and new media sites, and
misconcpetion seems to reign above many others, and that is that Google
will not make any money with Android other than (now sparse) mobile ad
revenue. This is a total misunderstanding of the Google/Android
Strategy. For those who cannot see the forest due to all of the tree
bark getting in your way, I urge you to review Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space:

Many commenters are lamenting on the
fact that Google is not making money on Android sales since the OS is
given away for close to free while Apple is making $250 per handset
sold. Those who are looking at it from this perspective are missing the
forest due to that big fat tree that is in their way! Yes, Apple is
making a killing on its iPhone sales, and it would be difficult to
attempt to catch them with a fat margined product. They have managed to
produce both margin and volume and have wrapped it up with extreme
customer loyalty. What the armchair pundits are missing is the power of
reach. Google is developing massive reach, and developing it
ridiculously quickly. A byproduct of this reach is the commoditization
of the smart phone platform which will probably cut the fat margined
business model off at its knees. That is not to say that Apple will be
cut off at the knees, but they will have to alter their business model
for the competitor-less margin that they enjoyed for the last three
years will no longer be a given. It also means that anyone else reaching
for the crown (including Apple) will have to spend more upfront to gain
less per unit sold. This actually benefits Google, for they are not in
the hardware race, yet they benefit from each and every handset, tablet,
desktop and automotive unit sold. Google is trying to become the new
Microsoft!

In the meantime, Google ramps up the
potential to push software as a cloud service, downloadable software and
interactive, activity/context sensitive rich media ads and services to
hundreds of millions of new users. This opens up a phenomenal
opportunity for Google, and it appears as if many are missing the point
because Google (wisely) decided not monetize it immediately, but to let
it gestate and grow. Do you remember 15 years ago when many felt the
same about search and the fact that Google wasn’t making any money
providing search (pre-advertising)?

How Google is Looking to Cut Apple’s Margin and How the Sell Side of
Wall Street Will Enable This Without Sheeple Investor’s Having a Clue

No, Google is not in the mobile space for search ads, it’s looking to
become the next Microsoft with Android as the next Windows. It is
thinking big, simultaneously going after both the consumer and the
enterprise space with cloud-based software and services – and
advertising!

In the meantime, sheeple-like investors are being hoodwinked by
quarter after quarter of Apple blow out earnings. Don’t get me wrong. I
feel and fully acknowledge that Apple is executing on all 8 cylinders of
a 6 cylinder engine, but it still has its real world limitations. Apple
will start to bump up against these limitation over the next 4
quarters, and the signs of this bump are already apparent. Of course,
the signs are being handily masked by the games that Apple management
and the sell side analysts of Wall Street play, with the “Sheeple”
retail and the lazier component of the institutional investors being put
out to take the eventual bullet.

Riddle me this – If
Apple can consistently beat the estimates of your favorite analysts
quarter after quarter, after quarter – for 11 quarters straight,
shouldn’t you fire said analysts for incompetency in lieu of celebrating
Apple’s ability to surprise? After all, it is no longer
a surprise after the 11th consecutive occurrence, is it? I would be
surprised if my readers were surprised by an Apple surprise. Seriously!
Apple management consistently lowballs guidance to such an extent that
it can easily manage, no – actually create outperformance. This has has a
very positive effect on their valuation. Of course, I do not blame
Apple management for this, of they are charged with maximizing
shareholder return. The analytical community and the (sheeple) investors
which they serve is another matter though. Subscribers can download the
data that shows the blatant game being played between Apple and the
Sell Side here: Apple Earnings Guidance Analysis. Those who need to subscribe can do so here.

Below, I drilled down on the date and used a percentage difference
view to illustrate the improvement in P/E stemming from the earnings
beats.

In our analysis of Apple, we are using real world assumptions of future performance derived from backing in
to the low balling this company is prone to. If you look at its history
carefully you can gauge what management is comfortable with, hence what
they may be capable of on the margin. Using these more realistic
numbers, it is much more likely Apple will deliver a miss in the
upcoming quarters in its battle with the Android! The following is the
reason why.

Apple is growing like a weed and at expanding margins, but those
margins are most likely at (or close to) their peak and will probably
drop rather quickly since The Apple “beats” analyzed above include
margins, and the company has consistently beat on margin. Keep in mind
that Apple has very strong competition in their most lucrative space
where they literally had none before. The competition is already
outselling them and offering more technical flexibility and diversity.
Thus, when (and that is an emphatic when, not an “if”) margins
“continues to drift downward, the sheeple will be clueless and probably
pile deeper into Apple stock because they will probably still be
“beating” at every earnings announcement. The NPD Group,
a provider of current consumer POS analysis is the latest in an
increasing list of consultancies that show Android taking the number one
spot in the Smartphone market (both in terms of sales growth and
installations.

The NPD Group: Motorola, HTC drive Android to Smartphone OS lead in the U.S.

Android now installed in one of every three smartphones sold at retail. BlackBerry OS share drops 9 points to 28 percent.

PORT WASHINGTON, NEW YORK, August 4, 2010 -
Riding the wave of new handset introductions and wide carrier
distribution in the second quarter (Q2), the Android smartphone
operating system (OS) continued its upward climb in the U.S. consumer
mobile phone market, according to The NPD Group, a leading market research
company. For the first time since the fourth quarter (Q4) of 2007, RIM
fell to second position, as Android took the lead among operating
systems in handsets sold to U.S. consumers. NPD’s latest wireless market research
reveals that Android accounted for 33 percent of all smartphones
purchased in Q2, ahead of RIM (28 percent) and Apple (22 percent).

“For the second consecutive quarter,
Android handsets have shown strong but slowing sell-through market share
gains among U.S. consumers,” said Ross Rubin, executive director of
industry analysis for NPD. “While the Google-developed OS took market
share from RIM, Apple’s iOS saw a small gain this quarter on the
strength of the iPhone 4 launch.”

Based on U.S. consumer purchases of mobile phones in Q2, the top 5 Android smartphones were as follows:

Motorola Droid

HTC Droid Incredible

HTC EVO 4G

HTC Hero

HTC Droid Eris

“Blackberry 6 will soon offer
features that have been popular in recently launched Android handsets,
such as support for capacitive touchscreens and a WebKit-based browser.
However, the Blackberry Torch lacks the large screen allure that has
characterized the best selling Android devices at its price point,
including the Droid Incredible and EVO 4G,” Rubin said.

Model selection and promotions continue to play a role in the race for carrier dominance. According to NPD’s Mobile Phone Track,
Verizon Wireless has maintained its lead among top carriers for the
last three quarters comprising a third (33 percent) of the units sold in
the U.S. mobile phone market in Q2, followed by AT&T (25 percent),
Sprint (12 percent), and T-Mobile (11 percent). In Q2 Verizon Wireless
continued their buy-one-get-one (BOGO) offers on all smartphones,
including both RIM and Android models.

In spite of an overall decline in the
number of mobile phones purchased year over year, the ongoing
popularity of both messaging phones and smartphones, which are generally
more costly than standard feature phones, resulted in slightly higher
prices for all mobile phones in Q2. The average selling price for all
mobile phones reached $90, which is a 3 percent increase since Q2 last
year. Smartphone unit prices, by comparison, averaged $143 in Q2 2010,
which is a 9 percent decrease over the previous year.

Data Note: The information in this
press release is from Mobile Phone Track – NPD’s consumer tracking of
U.S. consumers, aged 18 and older, who reported purchasing a mobile
phone. NPD does not track corporate/enterprise mobile phone purchases.

Now, Apple will not sit on its laurels while Android eats its lunch,
but their are only three realistic ways in which Apple can compete.

They can compete on price, which they now have the scale and volume
to do, but is the antithesis of the “Premium Apple Brand” that they have
worked so hard (and quite successfully so, may I add) to create over
the last few years. More importantly, it will materially (and potentially drastically) impact margins.

They can compete on features and technology. This will be very
difficult to accomplish due to the sheer extent of competition they are
facing. Apple will effectively have to out engineer Samsung, Motorola,
HTC and about 70 other manufacturers on the hardware side and
simultaneously outrun Google’s Android and its army of hundreds of
thousands open source contributors on the software side. This is highly
unlikely. Doable but improbable. More importantly, it will materially (and potentially drastically) impact margins.

They can license their OS along with minimum hardware specs to third
parties. This seems to be the most logical step to the possibility of
longer term dominance, but also apparently flies in the face of both the
company’s culture and the company’s history. More importantly, it will materially (and potentially drastically) impact margins.
If you remember, this is how Apple lost the PC wars, by refusing to
license the OS as the PC became commoditized and prices fell through the
floor. Microsoft benefited immensely from this occurrence for it did
not make hardware, but it did benefit from every piece of hardware sold.
Does this sound even remotely familiar (hint: Google cloud services) to
anyone???

So, what is the recurring theme in all of these decision branches? Let me help out those who are still not getting it: More importantly, it will materially (and potentially drastically) impact margins. So,
as Apple’s margins dwindle due to competition from the Android, they
will consistently beat expectations since the sell side analyst
community continues to play this non-sense game. As for those who don’t
believe it can happen so quickly, take a look at Apple’s margins for the
last quarter…